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Ontario government consulting on proposed design of the new cap-and-trade program

The Ontario Ministry of the Environment and Climate Change (MOECC) has released details of its proposed cap-and-trade program designed to address climate change through the reduction of greenhouse gas (GHG) emissions. On April 15, 2015, the Ontario government signed an agreement with Quebec to create a joint cap-and-trade system to reduce GHG emissions. The cap-and-trade program will be the primary tool for Ontario seeking to achieve its 2020 targets of emissions being 15 per cent below 1990 emission levels. For further background on the proposed cap-and-trade scheme, please see our April 2015 Blakes Bulletin: Ontario to Adopt Cap-and-Trade System, Joining Quebec and California Carbon Market.

The Cap and Trade Program Design Options were posted for comment on www.ebr.gov.on.ca by the government on November 16, 2015, for comment until December 15, 2015. The document, which is summarized in this Bulletin, seeks input on various elements of the program including the timing; scope of the program, setting the caps on GHGs, allowance distribution, price stability mechanisms and enforcement.

A draft regulatory proposal is scheduled for early 2016 with a view to the cap-and-trade system beginning on January 1, 2017. The first auction of emission allowances is scheduled for March 2017. This start date means that the cap needs to decline by 3.7 per cent per year to achieve the 2020 targets.

Program Scope

The location of the measurement of the emissions will vary depending on the nature of the sector. Two types of emissions will be covered — combustion emissions and fixed process emissions. Sectors covered by the program will be the following:

Electricity (including imported electricity for consumption in Ontario): domestic electricity generation will be covered at the fuel distributor level and imports will be covered at the point the electricity enters the province

Industrial and large commercial and Institutions: if GHG emissions are greater than 25,000 tonnes, they will be covered at the point of emission

Transportation fuel: covered at the distribution level when they are first placed into the market

Distribution of natural gas: if GHG emissions are greater than 25,000 tonnes, the point of regulation will be when the gas is transferred from pipeline into the distribution network for local customers

New and Expanding Facilities

New facilities (that begin operating after January 1, 2016) will have a compliance obligation starting in their third year of operation. However, existing facilities that expand and whose emissions exceed the 25,000 tonnes per year threshold would have a compliance obligation starting in the first year that the threshold is met.

Opting in

Facilities that are obliged to report emissions under the Greenhouse Gas Emissions Reporting Program are permitted to voluntarily opt into the program, but once an entity opts in, it cannot opt out of the program.

The Caps

Each year caps will be set that limit the amount of allowable GHG emissions, measured in tonnes of carbon dioxide equivalent. Sector level targets are being considered.

Market Rules

The market will include registration requirements, auction rules, trade rules, market rules (including limits on the allowances entities can acquire in an auction and the amount they can hold) and strategic reserve allowances sales.

Price Stability

The market will be designed to balance flexibility with predictability. This will be achieved by setting a minimum price level at auction and a strategic reserve of allowances will be maintained. The reserve price at the most recent Quebec-California auction in August was C$15.84/t. It is proposed that five per cent of allowances from the cap year would be set aside as a strategic reserve — price tiers will be set for these allowances.

Carbon Leakage

Carbon leakage occurs when the production of a facility shifts to a jurisdiction with a less stringent carbon pricing policy. There may be specific sectors that are emissions-intensive and trade-exposed. Mechanisms to reduce this risk could include:

?Distribution of a portion of free allowances to emission-intensive and trade-exposed sectors (these would not be available for electricity generation emissions).

The inclusion of a market design feature to provide compliance flexibility for certain entities to plan and implement compliance strategies that work best for them.

Allowing the use of offset credits as a compliance instrument that can help reduce compliance costs and may produce co-benefits including health, social and benefits. The use of offsets shall be limited to eight per cent of the total compliance obligation.

Applying border carbon adjustments for electricity and fuels to level the playing field for traded goods and reduce leakage.

Early Reductions

The new program notes that some entities will have already made investments to reduce emissions and these should be acknowledged. These can be recognized by basing the number of allowances that an entity receives on product output benchmarks — these are based on average emissions of a sector and therefore facilities that are more efficient than the sector benchmark will receive more allowances than their emissions and be in credit. The program could also issue early reduction allowances to reward actions that meet specific requirements.

Compliance

At the end of a compliance period, all entities with a compliance obligation must surrender a number of compliance units (allowances or off-set credits) that are equal to their emission during the period — this process is called “true-up”. Entities with a compliance obligation would be required to true-up for 100 per cent of their emissions by November 1 of the year following the end of the compliance period. Partial true-up may take place in the first compliance period.

Enforcement and Penalties

Enforcement action will be taken if excess emissions are made (i.e. not enough compliance instruments are available for an entity at true-up); fraudulent or misleading information is provided; non-compliance with the trading, auction or market rules takes place. Penalties could include requiring triple allowances, suspension of the holding account, revocation of registration or administrative monetary penalties.

Offsets

The types of offset projects that are being considered and included are: mine methane capture and destruction; landfill gas capture and destruction; ozone depleting substances capture and destruction. Other potential offset projects include organic waste digestion, afforestation, and grassland projects.

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